How to spend first million in your startups?

The first $1 million raised is critical to cement a startup’s foundation and the basis on which future funding rounds will be built.Krithika Krishnamurthy&Harsimran Julka | ET Bureau | Updated: August 14, 2015, 10:51 IST

The first $1 million raised is critical to cement a startup’s foundation and the basis on which future funding rounds will be built.BENGALURU|NEW DELHI: Even as RedBus was being sold to Ibibo for Rs 600 crore in July 2013, visitors could see batteries for an inverter lying beside a shabby staircase that led to a very basic office. "We had learnt to conserve cash early, learning from the crisis of Lehman Brothers. At the time of exit we still had a lot of unused cash in the company's account," Phanindra Sama, founder of India's largest bus-ticketing platform, told ET after the sale.

The RedBus team had decided to work out of a basic office, take small salaries and conserve all cash in building a business that make for the largest exit in India's startup history.

"A lot of startups, when they receive large funding, start spending on unproductive areas such as office upgrades, unnecessary technology tools... These should be avoided," said Sanjay Parthasarathy, CEO of data analytics firm Indix that recently raised $15 million.

"The startup should ideally increase burn exponentially month on month and not burn funds faster such that they don't last more that 18 months," advises Harshad Lahoti, cofounder at deal making platform ah! Ventures. "Money needs to be spent to active traction which will help them crack their series B funding within next 12-18 months," Lahoti said. Parthasarathy said he did all he could to avoid having a workspace in the initial days. "I worked out of home, then at Starbucks and sometimes even Barnes and Noble," he said.

The first $1 million (about Rs 6.4 crore) raised is critical to cement a startup's foundation and the basis on which future funding rounds will be built. If wasted, the company may not get a second chance.

Sai Srinivas Kiran, CEO of media streaming device maker TeeWee, agrees. "The whole thing about starting up is that you don't spend on workspace and unnecessary enhancements," said Kiran, who raised Rs 11 crore in March. It is also important to pay more attention to customers. "Set aside money for taking care of your customer.

Ensure there is a system in place to take calls and customer queries all the time," said Sanjay Anandram, venture partner with Seedfund. While it is important to not splurge, startups could do well to spend some of the first million dollars on employees. Vijay Sharma, cofounder of recruitment firm Belong that recently raised $5 million, said he bought his employees the basic stuff: Ergonomic chairs, big monitors. Importantly, he employed a cook for the office.

"The (first $1 million) should be used to find the sweet spot where an acute pain point meets a fantastic solution," said Anshuman Bapna, founder of travel planner MyGola that MakeMyTrip recently acquired, "and you find your first set of users coming back to you over and over again".